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New avatar of IFRS 9

IFRS 9 – July 2014 version replaces all earlier versions of IFRS 9 viz., IFRS 9 (2009), IFRS 9 (2010) and IFRS 9 (2013). The good news is that the project is complete. The final version encompasses classification and measurement, new impairment model, revised hedge accounting aspects and replaces IAS 39: Financial Instruments, Recognition & Measurement. Accounting for dynamic risk management is considered as a separate project from IFRS 9 and is still pending.

Salient features of this revised, updated and final IFRS 9 standard that is effective for annual periods beginning on or after 1-Jan-2018 are as follows:

  1. Logical single classification and measurement approach for financial assets that reflects the business model of the entity;
  2. Forward-looking expected credit loss model;
  3. Own credit gains and losses presented in OCI for FVO liabilities instead of recognizing the same in profit or loss. This removes the counter-intuitive paradox of entities booking gains when the value of their own debt falls due to decrease in their own credit worthiness;
  4. Improved hedge accounting model that reflects the economics of risk management while accounting for the same.

It is disheartening to note that IASB and FASB, being the officially recognized standard setting bodies on both sides of the Atlantic were unable to see eye to eye while finalizing the proposals for impairment model while drafting the standards for financial instruments.

IFRS 9 emerges as a principle based standard where the classification is based on business model and nature of cash flows as opposed to intention and ability to hold which were the bases for classification in the earlier IAS 39 standard. Also IFRS 9 simplifies the reclassification process which again is closely tied to the business model rather than the complicated rule-based reclassification provisions.

  1. Classification & measurement: Under the new requirements debt instruments can only be measured at fair value through OCI if they are held in a particular business model. That is different to the available-for-sale category today, which is generally an unrestricted option. In order to be classified at fair value through OCI, a debt instrument needs to both have simple principal and interest cash flows and be held in a business model in which both holding and selling financial assets are integral to meeting management’s objectives. This change provides more structure around the classification of these types of assets, which results in better information in the primary financial statements because it directly reflects both the nature of the instrument’s contractual cash flows and the business model in which that instrument is held.
  2. New impairment model: The new impairment model address the concerns of the ‘incurred loss model’ where the recognition of impairment is considered to be ‘too little and too late’. Measurement of impairment will be the same regardless of the type of instrument held and how it is classified. The new impairment model provides two important pieces of information to assist users of financial statements in understanding changes in the credit risk performance of financial instruments.
    1. A portion of expected credit losses (a 12-month measure) is recognized for all relevant financial instruments from when they are first originated or acquired. In subsequent reporting periods, if there has been a significant increase in the credit risk of a financial instrument since it was first entered into or acquired, full lifetime expected credit losses would then be recognized.
    2. The way in which interest revenue is calculated depends on whether an asset is considered to be actually credit-impaired. Initially interest is calculated by applying the effective interest rate to the gross amount of an asset. However, if an asset is considered to be credit-impaired, the calculation changes to applying the effective interest rate to the amortized cost amount (i.e. net of the impairment allowance) of the asset.

New requirements of the impairment model:

  • Based on entity’s expected credit losses on financial instruments, recognize expected credit losses at all times and update the changes in the credit risk of financial instruments
  • Model is forward-looking
  • Eliminates the threshold for the recognition of expected credit losses
  • More timely information provided about expected credit losses
  • Same impairment model applied to all financial instruments

Stage 1

  • 12 month expected credit losses recognized in profit or loss through a loss allowance as soon as a financial instrument is purchased
  • Proxy for initial expectation of credit losses
  • For financial assets, interest revenue is calculated on the gross carrying amount (before adjusting for the expected credit losses)

Stage 2

  • If the credit increases significantly and the resulting credit quality is not considered to be low credit risk, full life-time expected credit losses are recognized
  • For financial assets, interest revenue is calculated on the gross carrying amount (before adjusting for the expected credit losses) – Same as for Stage 1

Stage 3

  • If the credit increases to the point that it is considered credit-impaired, full life-time expected credit losses are recognized – Same as in Stage 2
  • For financial assets, interest revenue is calculated on the amortized cost (gross carrying amount less life-time expected credit losses)
  • Financial assets in Stage 3 will generally be individually assessed
  1. Accounting for changes in ‘own credit’: IFRS 9 requires liabilities that an entity elects to measure at fair value to be recognized on the balance sheet at (full) fair value as changes in fair value provide useful early warning signals of changes in an entity’s own credit risk. However, to address the concerns about accounting for ‘own credit’, IFRS 9 will require the portion of fair value changes caused by changes in the entity’s own credit risk to be recognized in Other Comprehensive Income (OCI) rather than in profit or loss. This will remove the counter intuitive effects that result from accounting for changes in ‘own credit’ through profit or loss.
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As per the modifications made to the comprehensive guidelines on derivatives issued by the Reserve Bank of India in early August 2011, banks cannot sell derivatives to corporates without getting approval from the board of directors of such corporates. It is significant to note that banks would be allow to deal with derivatives with any corporate only if the company has a risk management policy approved by its Board in place among several other conditions.

As per the modifications the Banks are required to obtain Board resolution from the corporate that states the following:
1. The corporate has in place a Risk Management Policy approved by its Board which contains the following:

  • Guidelines on risk identification, measurement and control
  • Guidelines and procedures to be followed with respect to revaluation and monitoring of positions
  • Names and designation of officials authorized to undertake transactions and limits assigned to them
  • A requirement that the assignment of limits to an official would be specific and in case the limits assigned are not quantified, then the bank should offer derivative products to that client only after getting appropriate documents certifying assignment of specific limits
  • Accounting policy and disclosure norms to be followed in respect of derivative transactions
  • A requirement to disclose the MTM valuations appropriately
  • A requirement to ensure separation of duties between front, middle and back office
  • Mechanism regarding reporting of data to the Board including financial position of transaction etc

2. The corporate has laid down clear guidelines for conducting the transactions and institutionalised the arrangements for a periodical review of operations and annual audit of transactions to verify compliance with the regulations.

3. Market-makers should not undertake derivative transaction with users till they provide a Board or equivalent forum resolution stating that they have in place a Board approved Risk Management Policy which contains the details as mentioned above.

Source: Comprehensive Guidelines on Derivatives: Modifications

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RBI to introduce new 10-yr govt bond on 4-Nov-2011

The Reserve Bank of India (RBI) is to auction a new government security of 10-year maturity this Friday. The government will issue Rs 6,000 crore under the new security at a coupon rate to be decided in the auction.

The government is set to borrow Rs 2.2 lakh crore in the period from October 2011 to March 2012. This is Rs 52,800 crore more as compared to the Rs 1.67 lakh crore budgeted earlier. The higher than planned borrowing programme pushed yields on the current 10-year benchmark above three-year highs. As a result, all the three auctions conducted so far in the second half have seen devolvement on underwriters in at least one government security.

Source: Business Standard

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Fixed Income Securities – FVPL

• Fixed income security refers to any type of investment that yields a regular or fixed return. It is an investment that provides a return in the form of fixed periodic payments and the eventual return of principal at maturity. In a variable income security, payments change based on some underlying benchmark measure such as short-term interest rates. However, in this and subsequent chapters, by fixed income securities we mean debt securities that yield a regular return in the form of interest. The terms “debt securities” and “fixed income securities” are used here interchangeably.
• A debt security is defined as “any security representing a creditor relationship with an enterprise.”
• The term “debt security” includes, among other items, U.S. Treasury securities, U.S. government agency securities, municipal securities, corporate bonds, convertible debt, commercial paper, all securitized debt instruments, such as collateralized mortgage obligations (CMOs) and real estate mortgage investment conduits (REMICs), and interest-only and principal-only strips.
• A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity. Investments in equity shares are a form of financial asset.
• Investments in debt securities are classified as either fair value through profit and loss or as available-for-sale securities or held-to-maturity investments.
• IFRS 9 is the first part of Phase 1 of the IASB’s project to replace IAS 39. Financial Instruments: Classification and Measurement, which is Phase 1, was published in July 2009 and contained proposals for both assets and liabilities within the scope of IAS 39. An entity shall apply IFRS 9 for annual periods beginning on or after 1 January 2013.
• An entity shall classify financial assets as subsequently measured at either amortized cost or fair value on the basis of both:
• The entity’s business model for managing the financial assets; and
• The contractual cash flow characteristics of the financial asset. (IFRS 9 Para 4.1)
• As per US GAAP, an entity shall classify debt securities into “trading” if it is acquired with the intent of selling it within hours or days. However, at acquisition an entity is not precluded from classifying as “trading” a security it plans to hold for a longer period. Classification of a security as trading shall not be precluded simply because the entity does not intend to sell it in the near term. Investments that are classified as “trading” securities are classified under “fair value through profit or loss” category.
• Bonds are either subscribed at the initial off er through the primary market route or purchased through the secondary market. In a secondary market the buy order is placed through a broker known as a counter party. Most corporate bonds are traded over-the-counter.
• Interest on bonds is payable by the issuer on the coupon date. Investors should account for the interest on the coupon date. However, the interest accrues on the bond on a daily basis even though it is paid periodically as per the terms of the bond, usually on a semi-annual basis.
• Corporate action is, as the name implies, an action taken by the issuer of the bonds that impact the investments or earnings from such investments. Typical examples of corporate actions include interest payment by the company, calls or the issuance of new debt by the issuer that result in change of the name, or number of bonds held by the investor, and so on.
• One of the key activities during the trade life cycle of fixed income securities is the corporate action in the form of interest as stated on the face of the bond. The accounting event for coupon accrual is recorded on the date on which the interest becomes payable by the company.
• The accrued interest purchased on the date of purchase of the bond is reversed on the first date on which interest is payable by the company. This effectively reduces the interest income during the first period during which the bond is held by the investor.
• The bonds should be carried in the books at fair market value for bonds that are held as trading securities. However, interest should be accounted for as though the bond is required to be shown on the basis of amortized cost. The premium paid or discount realized on purchase of the bond should be amortized over the remaining life of the bond on a yield-to-maturity basis. Such an amortized premium or discount is added with the interest on the one hand and held separately in a mark-to-market account on the other.
• The effective interest is calculated based on an iterative process in such a way that the carrying cost is increased to the extent of the effective interest for the period the bond is held. The carrying cost at the end of the tenure of the bond should be equal to the face value of the bond.
• Since interest accrues on a day-to-day basis, the interest on bonds held by the investor from the date of the previous coupon date until the valuation date should be recorded in the books of accounts as “Interest Income” for the period.
• At the end of every valuation date the fair value of the bond is ascertained and the bonds are mark-to-market. This process is known as “portfolio valuation.” The market rate at the end of the period is determined from the primary stock exchange where the bonds are traded. If there is an increase in the market rate over and above the purchase rate then such an increase is recognized as an unrealized gain and the corresponding amount is shown in the MTM—Bonds—FVPL (Asset/Liability) account.
• Interest accrues on the bond on a daily basis even though it is paid periodically, as per the terms of the bond usually on a semiannual basis. Hence, when the bond is sold, the investor actually should get not merely the value of the bond but also the interest element from the previous coupon date until the date of settlement of the trade.
• The profit or loss on liquidation of the bonds is ascertained by deducting the cost of sales from the net sale consideration. Cost of sales is arrived at by following FIFO, LIFO or the weighted average method.
• Certain debt instruments have a call provision which grants the issuer an option to retire all or part of the issue prior to the maturity date as mentioned in the document, even though most of the new bond issues usually have some restrictions against certain types of early redemption.
• Functional is the currency of the primary economic environment in which the entity operates. All other currencies other than the functional currency are known as foreign currencies for the entity. Presentation currency is the currency in which the financial statements are presented to the investors. The entity is free to choose any currency as its presentation currency.
• A foreign currency transaction is a transaction that is denominated in a currency other than the entity’s functional currency or requires settlement in a foreign currency. “Denominated” means that the balance is fixed in terms of the number of units of a foreign currency regardless of changes in the exchange rate.
• An entity must convert foreign currency items into its functional currency for recording in its book of accounts. On initial recognition foreign currency transactions are recorded in the functional currency by applying to the foreign currency amount the spot exchange rate between the functional currency and the foreign currency at the date of the transaction.
• Under the relevant accounting standards foreign currency monetary items are treated differently from foreign currency non-monetary items during subsequent recognition of those items on any valuation date. The essential feature of a monetary item is the right to receive or an obligation to deliver a fixed or determinable amount of units of currency.
• When an asset is non-monetary and is measured in a foreign currency, the carrying amount is determined by comparing the cost or carrying amount, as appropriate, translated at the exchange rate at the date when that amount was determined (i.e., the rate at the date of the transaction for an item measured in terms of historical cost); and the net realizable value or recoverable amount, as appropriate, translated at the exchange rate at the date when that value was determined (e.g., the closing rate at the end of the valuation date). The effect of this comparison may be that an impairment loss is recognized in the foreign currency but would not be recognized in the functional currency, or vice versa.
• Exchange differences arise from the settlement of monetary items at a subsequent date to initial recognition, and re-measuring an entity’s monetary items at rates different from those at which they were initially recorded (either during the valuation date or at the previous valuation dates). Such exchange differences must be recognized as income or expenses in the period in which they arise.
• When a gain or loss on a non-monetary item is recognized in profit or loss, any exchange component of that gain or loss is also recognized in profit or loss. When a gain or loss on a non-monetary item is recognized directly in other comprehensive income, any exchange component of that gain or loss is recognized directly in other comprehensive income.
• For every transaction denominated and recorded in a foreign currency, a corresponding journal entry is recorded and accounted for in its functional currency, based on the foreign exchange rate on the date on which such a transaction is recognized. This process is known as FX revaluation.
• FX translation is required to be performed by the investor to adjust the FX rate differential between the transaction date and the valuation date in respect of all assets and liabilities, which can either be monetary items or non-monetary items.
• When an entity trades in foreign currency (i.e., where the trade currency is different from the functional currency), then the total unrealized gain or loss consists of two components—capital gain and currency gain.

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Product Description
While there are a number of outstanding texts on valuation of interest rate derivatives, there are hardly any that provide a comprehensive treatment of the relevant accounting principles. Venkata Subramani’s well-structured book does a great job in filling this void. For each instrument, the author first provides a clear description of the product and its associated cashflows. He then proceeds to discuss the finer aspects of accounting using detailed examples which will
definitely enrich the reader’s knowledge of the subject. This book, written by a leading subject expert, is definitely unique in its treatment and content.

Prof. R. L. Shankar
Head, Center for Advanced Financial Studies, Institute of Financial Management and Resource (IFMR)
Program Director, MBA-Financial Engineering
Chennai, India

This second volume by R. Venkata Subramani is a valuable contribution to the accounting and finance literature providing comprehensive coverage of accounting for fixed income securities and interest rate derivatives. Subramani provides a systematic and step-by-step description of, and accounting for, all the possible events and transactions in the life of the security or derivative concerned. This excellent feature makes it effective for the reader to attain an in-depth understanding of the topics covered. I am sure that this book will be greatly appreciated by users of financial statements, academics and business students.

Srinivasan Rangan
Associate Professor of Finance and Control
Indian Institute of Management
Bangalore, India

The recent global financial crisis has resulted in a thorough review and overhaul of accounting standards in order to improve financial reporting and enhance investor confidence. Although accounting for fixed income and derivative financial instruments is complex this book provides the reader with a clear and concise explanation of this intricate subject. The informative product descriptions and detailed explanations of the accounting events at each stage of the trade life cycle will be of great benefit to those who want to gain a better understanding of this intricate topic.

Loretta Wickenden
Chief Executive Officer
Latilla LLC
USA

With this second volume Venkata Subramani has structured a very comprehensive book focused on accounting for fixed income securities and interest rate derivatives. This author puts in perspective a very detailed and exhaustive presentation of the nuances of the different flavors of financial instruments and a detailed description of the related accounting events and associated entries. It becomes very effective because every example details how the life cycle of financial instruments interacts with the accounting output making this book a helpful bridge between the financial products and their accounting translation.

Jean-Daniel Morfin
Product Manager
Calypso Technology
France
From the Inside Flap
Accounting for Investments Volume 2: Fixed Income Securities and Interest Rate Derivatives – A Practitioner’s Guide is one of the most comprehensive reference works on accounting for financial products. This companion volume to Accounting for Investments Volume 1: Equities, Futures and Options starts from fixed income securities and interest rates. Accounting for Investments Volume 2 starts from the basics for the financial products covered, defining the product, the way it is structured, its advantages and disadvantages, the different events in the trade life cycle and then elaborates on the accounting entries that are necessary for the same. The book also explains how the entries get reflected in the general ledger accounts, giving a macro-level picture for the reader to understand the basics of the effect of such accounting. This volume is the presentation of the results in the final accounts—the income statement and balance sheet and disclosure requirements are also covered.

Accounting for Investments Volume 2 will prove useful to an expert as well as a novice, not to mention the ever-increasing number of technology consultants who require for such a book.

While generally accepted US accounting principles and the International Financial Reporting Standards (IFRS) are given adequate treatment, the readers are advised to refer to the appropriate GAAP requirements for their own country. The accounting standards that are dealt with here in the book can, however, be used as a benchmark to understand the specific requirements of
other countries.

Product Details

Hardcover: 576 pages
Publisher: Wiley; 1 edition (July 20, 2011)
Language: English
ISBN-10: 047082591X
ISBN-13: 978-0470825914
Product Dimensions: 10.1 x 7.2 x 2 inches
Shipping Weight: 3.4 pounds (View shipping rates and policies)

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Accounting for Investments – Fixed Income Securities & Interest Rate Derivatives is the second volume of the Accounting for Investments series. This volume covers the financial instruments of fixed income securities and interest rate derivatives viz. interest rate swaps, caps, floors, collars, reverse collars and cross currency swaps. As in the first volume, this book provides an exhaustive treatment of accounting, presentation and disclosure aspects of any entity dealing with such financial instruments.
Since the break out of a severe financial crisis starting in the year 2008 that virtually crippled the world economy, the regulatory authorities including the accounting standard setters have been on their toes and, thanks to their tireless efforts, a substantial addition to the knowledge of accounting has been made along with a thorough overhaul of the accounting standards relating to financial instruments. The good news is that the seat of accounting standard setting authorities on both sides of the Atlantic are now speaking in a singular voice despite some lag in the implementation timeline. This means that very soon there will be a “convergence” in spirit of the world’s top two standards , although it may take a little longer before we see a single converged standard in letter.

Never in the past have we seen such rapid succession of accounting standards issued on financial instruments continuously revised and fine-tuned, based on feedback received from the accounting fraternity and other users of financial statements across the globe. While these measures are an attempt to bring about a better accounting model by plugging the inherent gaps and inconsistencies in today’s complex economic environment, no one can say for sure whether these changes would prevent such occurrence of financial crises in the future. Nevertheless, it is a good development and this book captures the changes that have already been announced irrespective of the actual date of implementation, and other key proposals in the exposure draft stage are also considered at the appropriate places.

This book assumes that the reader already has basic accounting knowledge. Those who are entirely new to the field of accounting should refer to some basic accounting books before attempting to this one. It might be useful to have some basic orientation on accounting for investments, especially plain derivatives on equity instruments like equity futures and equity options to understand better the concepts given in this volume. However, it is not a must and the readers can easily grasp the essentials as this volume is meant to be self-sufficient in dealing with basic accounting concepts in so far as it relates to the particular financial instrument under review.

The entire trade life cycle of each financial instrument is covered in detail from the accounting perspective. For each illustration, the accounting journal entries, general ledger accounts, trail balances, income statements and balance sheets are presented to give a complete understanding of the accounting treatment. Also for all calculated numbers the details of such calculations are given. The presentation and disclosure requirements for these financial instruments are given separately in an exclusive chapter and are not given as part of each illustration and solution to the worked out problems in this book.

While an overview of the trade life cycle for each financial instrument is given, the readers are advised to refer other resources for a detailed treatment on the trade life cycle from the front office and middle office perspective. The trade life cycle in so far as it relates to the back office viz. the accounting aspects are covered in detail with appropriate reference to the GAAP or IFRS requirements. For each financial instrument, the relevant accounting standards that are applicable are given and wherever necessary a comparison showing the similarities and differences between the US GAAP and IFRS is also provided.

Chapter Arrangement:

Chapter 1: Fixed Income Securities – Theory – This chapter gives some basics of fixed income securities, basics of bond markets, types of issues and special characteristics, bond coupons, bond maturity, bond pricing, yield measures, duration and certain types of bonds like municipal bonds, corporate bonds, risks of investment in bonds and so on.

Chapter 2: Fixed Income Securities – Fair value through profit or loss – This chapter covers the accounting for fixed income securities held for trading purposes. After explaining the meaning and definition of fixed income securities, an overview of the categories of financial instruments is given along with the recent changes contemplated by the accounting standard IFRS 9. The explanation of fair value through profit or loss is given with the circumstances in which the designation at fair value through profit or loss on initial recognition is allowed. Fair value concepts and the measurement hierarchy of fair value as per the accounting standard are explained here. The trade life cycle for fixed income securities held as trading securities is given with the accounting entries to be passed at various stages. Illustrations cover fixed income securities in the functional currency of USD held for trading purposes.
Distinctions between FX revaluation and FX translation are given in great detail along with the explanation of functional currency, foreign currency and presentation currency and the requirements of accounting standards in this regard. Another illustration covers bonds in AUD with the functional currency of USD explaining the FX revaluation and FX translation processes.

Chapter 3: Fixed Income Securities – Available-for-sale – This chapter covers the accounting for bonds that are held as available for sale. Amendments made through IFRS 9 that impacts this category is explained. FX translation on available-for-sale securities calls for some special treatment, which is explained in this chapter. The trade life cycle for bonds classified as available for sale securities is given with the accounting entries to be passed at various stages. One illustration covers equity shares in the functional currency of USD held as available for sale; one more illustration is given in a foreign currency with FX translation into the functional currency of USD.

Chapter 4: Fixed Income Securities – Held-to-maturity – This chapter covers the accounting for bonds that are classified as held-to-maturity. Meaning of securities classified as held-to-maturity is discussed. Tainting rules along with exceptions are given. However, tainting rules are dispensed with in light of the recent changes made to this category. Similar changes are also proposed by the FASB. The concept of effective interest rates is then explained. Impairment provisions relating to amortized cost category is covered in this chapter. The trade life cycle for bonds classified as held-to-maturity securities is given with the accounting entries to be passed at various stages. Onet illustration covers equity shares in the functional currency of USD held as available for sale. FX revaluation and FX translation on held-to-maturity securities is explained with the help of one more illustration, which is given in foreign currency with FX translation and accounting entries in the functional currency.

Chapter 5: Presentation, Disclosure and Reclassification – This chapter covers the current accounting standards for the presentation of financial instruments in the financial reporting system, the mandatory disclosures required for these financial instruments, as well as the requirements when an entity reclassifies the financial instruments. The presentation and disclosure requirements are very important as these give quantitative and qualitative information about the financial position of the entity and provide adequate information for the reader of the financial statements to understand the nature and extent of risks undertaken by the entity. These presentation and disclosure requirements are mandatory and ought to have been provided in the illustrations and solutions to problems throughout this book. However, for the sake of convenience the requirements are all bunched and presented in this chapter only. Readers should understand that these requirements should be taken to be an inclusive component of the illustrations and solutions to the problems throughout the book.

Chapter 6: Interest Rate Derivatives – Theory – This chapter covers the theoretical aspects of interest rate derivatives. First an explanation of what is meant by derivatives in a financial instrument is explained, followed by a definition of derivatives as per US GAAP as well as IFRS accounting standards. Then the nuances of over-the-counter derivates are elaborated on comparing the same with exchange-traded derivative contracts. The benefits of interest rate derivatives are spelled out. The following common types of interest rate derivatives are briefly explained viz. forward rate agreements, interest rate swaps, caps, floors, interest rate collars, reverse collars, swaption, and cross currency swaps. The status of various financial instruments for hedging purposes is covered in this chapter.

Chapter 7: Interest Rate Swaps – Receive fixed and pay floating – This chapter covers the accounting aspects of interest rate swaps – receive fixed and pay floating. Meaning of interest rate swap – receive fixed and pay floating is explained with an illustration. The definition of a derivative as per US GAAP and as per IFRS is then given. The trade life cycle for an interest rate swap contract is given with the accounting entries to be passed at the various stages. The trade life cycle for an interest rate swap contract viz. recording the trade; accounting for the upfront fee in the form of premium on the trade; resetting the interest rate on the floating leg; accrual of interest on the pay leg as well as the receive leg on the valuation date; accounting for the interest payable on the pay leg as well as the receive leg on the coupon date; payment or receipt of net interest; valuation entries on valuation date; and the termination of the trade and accounting for termination fee are all covered. Ane illustration covers the accounting aspects of an interest rate swap contract in the functional currency of USD.

Chapter 8: Interest Rate Swaps – Pay fixed and receive floating – This chapter covers the accounting aspects of interest rate swaps –pay fixed and receive floating. The meaning of an interest rate swap – pay fixed and receive floating is explained with an illustration. The trade life cycle for an interest rate swap contract is given with the accounting entries to be passed at the various stages. The trade life cycle for an interest rate swap contract viz. recording the trade; accounting for the upfront fee in the form of premium on the trade; resetting the interest rate on the floating leg; accrual of interest on the pay leg as well as receive leg on the valuation date; accounting for the interest payable on the pay leg as well as the receive leg on the coupon date; payment or receipt of net interest; valuation entries on valuation date; and termination of the trade and accounting for termination fee are all covered. An illustration covers the accounting aspects of an interest rate swap contract in the functional currency of USD.

Chapter 9: Interest Rate Caps – This chapter covers the accounting aspects of interest rate caps. The meaning of interest rate caps is explained with an illustration, before covering the benefits of interest rate caps and the risk associated with it.
The trade life cycle for an interest rate cap contract is given with the accounting entries to be passed at the various stages. The trade life cycle for an interest rate cap contract viz. recording the trade; accounting for the upfront fee in the form of premium on the trade; receive or pay the interest on the coupon date depending upon the actual interest rate; valuation entries on valuation date; and termination of the trade and accounting for termination fee are all covered. An illustration gives the accounting aspects of an interest rate cap contract in the functional currency. One problem as a holder of the cap instrument and another problem as a writer of the cap instrument are also given here.

Chapter 10: Interest Rate Floors – This chapter covers the accounting aspects of interest rate floors. The meaning of interest rate floors is explained with an illustration before covering the benefits of interest rate floors and the risk associated with it.
The trade life cycle for an interest rate floor contract is given with the accounting entries to be passed at various stages. The trade life cycle for an interest rate floor contract viz. recording the trade; accounting for the upfront fee in the form of premium on the trade; receiving or paying the interest on the coupon date depending upon the actual interest rate; valuation entries on valuation date; and termination of the trade and accounting for termination fee are all covered. An illustration gives the accounting aspects of an interest rate floors contract in the functional currency. One problem as a holder of the floor instrument and another problem as a writer of the floor instrument are also provided.

Chapter 11: Interest Rate Collars and Reverse Collars – This chapter covers the accounting aspects of interest rate collars and reverse collars. The meaning of an interest rate collar is explained with an illustration, before covering the benefits of an interest rate collar and the risk associated with it. An interest rate collar is an instrument that gives protection against rising rates by guaranteeing that the holder will never pay above a pre-agreed rate but at the same time sets a downside rate below the floor rate, which the holder will benefit from if interest rates do fall below the floor rate. The trade life cycle for an interest rate collar contract is given with the accounting entries to be passed at the various stages. The trade life cycle for an interest rate collar contract viz. recording the trade, accounting for the upfront fee in the form of premium on the trade, receiving or paying the interest on the coupon date depending upon the actual interest rate, valuation entries on valuation date, termination of the trade and accounting for termination fee are all covered. An illustration gives the accounting aspects of an interest rate collar contract in the functional currency. Similarly, the accounting and trade life cycle of a reverse collar are also given with suitable illustrations.

Chapter 12: Cross Currency Swaps – This chapter covers the accounting aspects of cross currency swaps – receive floating and pay floating in different currencies. Meaning of a cross currency swap is explained with an illustration. The trade life cycle for a cross currency swap contract is given with the accounting entries to be passed at various stages. The trade life cycle for a cross currency swap contract viz. recording the trade, accounting for the upfront fee in the form of premium on the trade, resetting the interest rate on the floating leg, accrual of interest on the pay leg as well as receive leg on the valuation date, accounting for the interest payable on the pay leg as well as the receive leg on the coupon date, payment or receipt of net interest, valuation entries on valuation date, termination of the trade and accounting for termination fee are all covered. FX revaluation and FX translation for a cross currency swap contract is explained with the help of an illustration.

Appendix A: Time Value of Money – This appendix gives an overview of the mathematics involved in fixed-income securities transactions.

Appendix B: Recent Proposals in Accounting Standards – This appendix gives an overview of the recent proposals by the accounting standard setting authorities viz., IASB and FASB. The proposals are in the exposure draft stage and are yet to be promulgated as authoritative standards. The reason for covering this material in the appendix is that some of the changes contemplated have far-reaching implications on the accounting followed for the financial instruments covered in this volume.

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What is Credit Value Adjustment (CVA) in Accounting?

Counterparty credit risk (CVA) is the risk that the counterparty to a financial contract will default prior to the expiration of the contract and will not make all the payments required by the contract. Obviously exchange-traded derivatives are not subject to counterparty risk as the respective exchange guarantees the settlement of cash flows as per the derivative contract. CVA is a measure that adjusts the risk-free value of an instrument to incorporate counterparty credit risk. CVA can be positive or negative depending on which of the two counterparties is most likely to default and the relative balances due or receivable to each other.

There were some concerns expressed in certain quarters as to whether the Debit Value Adjustment (DVA) should be considered in determining the fair value. Now based on the recent exposure draft announced jointly by IASB and FASB on 28th January 2011 on Offsetting Financial Assets and Financial Liabilities it is amply clear that the DVA also should be recognized along with CVA.

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Product Description

The most practical, authoritative guide to governmental GAAPWiley GAAP for Governments 2011 is a comprehensive guide to the accounting and financial reporting principles used by state and local governments as well as other governmental entities. Designed with the needs of the user in mind, a “New Developments” chapter offers the important developments in governmental GAAP during the past year. 

  • Full coverage of authoritative accounting standards
  • Extremely useful and user-friendly examples, illustrations, and helpful practice hints
  • A comprehensive guide to the accounting and financial reporting principles used by state and local governments as well as other governmental entities
  • Provides a look ahead to the status of current and future Governmental Accounting Standards Board standards and projects
  • Offers information on the very latest in standard-setting activities
  • Also by Warren Ruppel: Governmental Accounting Made Easy

Wiley GAAP for Governments 2011 is a thorough, reliable reference financial professionals will consistently keep on their desks rather than on their bookshelves.  

From the Back Cover

The most practical, authoritativeguide to governmental GAAPWiley GAAP for Governments 2011 is a comprehensive guide to the accounting and financial reporting principles used by state and local governments as well as other governmental entities. Financial statement preparers, attestors, and readers will find its full coverage of authoritative accounting standards coupled with many examples, illustrations, and helpful practice hints extremely useful and user-friendly. Designed with the needs of the user in mind, a “New Developments” chapter keeps you informed of all the important developments in governmental GAAP during the past year. A look ahead at the status of current and future Governmental Accounting Standards Board standards and projects provides information on the very latest in standard-setting activities and covers: 

  • GASB Statement No. 51 Accounting and Financial Reporting for Intangible Assets
  • GASB Statement No. 52 Land and Other Real Estate Held as Investments by Endowments
  • GASB Statement No. 53 Accounting and Financial Reporting for Derivatives
  • GASB Statement No. 54 Fund Balance Reporting and Governmental Fund Type Devinitions
  • GASB Statement No. 55 The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments
  • GASB Statement No. 56 Codification of Accounting and Financial Reporting Guidance Contained in AICPA Statements on Auditing Standards
  • GASB Statement No. 57 OPEB Measurements by Agent Employers and Agent Multi-Employer Plans
  • GASB Statement No. 58 Accounting and Financial Reporting for Chapter 9 Bankruptcies
  • Exposure Draft Accounting and Financial Reporting for Service Concession Arrangements
  • Exposure Draft Financial Instruments Omnibus
  • Exposure Draft Pension Accounting and Financial Reporting
  • Latest on GASB Technical Plan  

Wiley GAAP for Governments 2011 strives to be a thorough, reliable reference that you’ll use constantly. It’s designed to be kept on your desk rather than on your bookshelf.


 

Product Details

  • Paperback: 600 pages
  • Publisher: Wiley; Revised edition edition (March 1, 2011)
  • Language: English
  • ISBN-10: 0470554460
  • ISBN-13: 978-0470554463

 

 

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Transitioning to IFRS in India

The Institute of Chartered Accountants of India has sent out recently 35 near-final Indian Accounting Standards (Ind-AS) — the Indian version of IFRS – to the National Committee on Accounting Standards (NACAS) for deliberation and finalisation, to emable transition to International Financial Reporting Standards. Over the past year, it has trained accountants on IFRS and issued a draft of the revised Schedule XIV to the Companies Act. It is now left to the regulators to take this forward and legislate on them.

Source: Business Line

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Product Description

A one-stop resource for understanding current International Financial Reporting Standards
As the International Accounting Standards Board (IASB) makes significant strides in achieving global convergence of accounting standards worldwide, the International Financial Reporting Standards (IFRS) become extremely important to the accounting world. Wiley IFRS 2011 provides the necessary tools for understanding the IASB standards and offers practical guidance and expertise on how to use and implement them.

  • Covers the most recent International Financial Reporting Standards (IFRS) and IFRIC interpretations
  • An indispensable guide to IFRS compliance
  • Provides a complete explanation of all IFRS requirements, coupled with copious illustrations of how to apply the rules in complex, real-world situations

Written by two well-known international experts on the subject with hands-on experience in applying these standards, this book is an indispensable guide to IFRS compliance.  

From the Back Cover

International Financial Reporting Standards (IFRS®) have received increased attention since such signal events as endorsements by the International Organization of Securities Commissions (IOSCO) in 2000, by the European Union (2002, mandating universal adoption by publicly held companies in 2005), and by the SEC (waiving reconciliation requirements for foreign private issuers using IFRS® beginning in 2007, and establishing a “road map” for adoption by U.S. public companies by 2016).With further refinements to IFRS® continuing to be made by the International Accounting Standards Board (IASB)—aided by work being performed pursuant to the “convergence” commitment made by the U.S. standard-setter, FASB—and given the now virtually unstoppable momentum worldwide to adopt (or, in some cases, adapt) IFRS®, mastery of this knowledge is becoming a necessity for all preparers of financial statements. Although only publicly held U.S. companies are facing an impending near-term mandate to convert to IFRS®, many private companies already are encountering requests or demands from their major customers, suppliers, joint venture partners, and affiliates to provide financial reports prepared under IFRS®. In all likelihood, replacement of U.S. GAAP by IFRS® will become a reality for even privately held enterprises within the foreseeable term. 

Experience from EU-based companies that implemented IFRS® financial reporting by 2005 suggests that such an undertaking may require a multi-year effort. Wiley IFRS® 2011 provides a complete explanation of all IFRS® requirements, coupled with copious illustrations of how to apply the rules in complex, real-world fact situations, and can be used both in training accounting staff and serving as a reference guide during actual implementation of IFRS® and preparation of IFRS®-based financial statements. Wiley IFRS® 2011 is equally valuable for preparers, auditors, and users of financial reports.To optimize the reader’s understanding, both examples created to explain particular IFRS® requirements and selections from actual published financial statements are provided throughout the book, illustrating all key concepts. Also included in this edition are a revised, comprehensive disclosure checklist; an updated, detailed comparison between U.S. GAAP and IFRS® , keyed to chapter topics; and integrated discussions of major ongoing IASB projects that may have significant impact on readers’ responsibilities over the coming year. 

Product Details

  • Paperback: 1128 pages
  • Publisher: Wiley (February 8, 2011)
  • Language: English
  • ISBN-10: 0470554428
  • ISBN-13: 978-0470554425
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